The Palestinian territories are facing a financial and political crisis as Israel and its allies bring pressure to bear on Hamas to renounce its past if it wants to translate last week's crushing election victory into acceptance as a Palestinian government.

The Palestinian Authority is unable to pay its 137,000 workers their monthly salary, in part because Israel has refused to hand over $45m (£25m) in monthly tax revenues because of the Hamas victory but also because foreign donors are withholding some aid over the issue of the PA's financial mismanagement.

After the election, western governments, led by the US, swiftly lined up behind Israel in demanding Hamas retreat from its longstanding goal of destroying the Jewish state, renounce violence and commit itself to existing agreements, including the Oslo peace accords, if it wants international recognition.

Israel was pleased about threats from Washington and the EU to cut most of the $1bn a year that keeps the PA afloat. "I think Israel is in an excellent position to generate a crisis that will bring a change in the attitude of the leaders of Hamas," said Gidi Grinstein, a former peace negotiator for the Israeli government.

Hamas has fought back by repeating what it has said for several years - that it is prepared to agree a long-term ceasefire with Israel if it withdraws to the 1967 borders. Hamas says it will let the "next generation" decide whether to turn that into a permanent peace agreement.

But Israel is pressing foreign governments to remain firm.

"Why should we go into an interim agreement with a partner who says that the purpose of the agreement is to gather strength in order to destroy us?" asked Yossi Alpher, a former adviser to Ehud Barak when he was prime minister.

Israel has said it will not talk to any Palestinian administration that includes "an armed terrorist organisation". Yesterday, the deputy prime minister, Shimon Peres, said Hamas will oversee an "authority of terror".

Yet opinion polls show that around half of Israeli voters believe their government should talk to Hamas on the grounds that you negotiate with enemies. Perhaps sensing the public mood, the Israeli cabinet found something good to say about Hamas this week when it recognised that it has shown "national responsibility" in calling for a coalition government.

"Hamas people are no fools. We're likely to see them agreeing with [the Palestinian president] Mahmoud Abbas to set up some sort of a technocrat government, something that doesn't quite look and smell like Hamas, on the assumption that we will not be able to, and perhaps will not wish to, boycott such a government," he said.

"Here we may face difficult choices, and some disagreement with our friends in the west who thus far have maintained a united front with us on these issues." European governments are likely to look more favourably on Hamas if it rids itself of its armed wing, as it says it intends to do by putting it under the authority of the Palestinian security forces.

Mr Grinstein says that will present a tough choice for Israel if the Europeans consider it as fulfilling their demand for Hamas to disarm in line with the road map peace plan. "The big question is whether the incorporation of Hamas forces into Palestinian armed forces amounts to the dismantling of infrastructure under the road map. That is one of the first questions Israel will face," he said.

Israel is also uncertain whether Mr Abbas is an asset or a liability in its strategy to curb Hamas. It has been pleased by his statements that he is not prepared to accept a Hamas-led government that does not accept the Oslo accords and all they imply, including recognition of Israel.

But Mr Grinstein says Israel also fears Mr Abbas is too weak to rein in Hamas. "The perception of Abbas on the Israeli side is of a person who cannot deliver. He may be perceived as an obstacle right now, especially if he stands in the way of applying direct pressure on Hamas, in the way of what you might call the political line of fire by Israel against Hamas."

The Palestinian cabinet minister, Ghassan Khatib, has warned Israel not to press too far or it risks finding itself being forced to take responsibility for the Palestinian population once again. "If the international donor community stops aid, it is not Hamas but the Palestinian Authority that will collapse, something nobody is likely to want to see," said Mr Khatib.

"At the moment, Israel is encouraging the world to boycott a PA led by Hamas. However, if Israel succeeds in building an international consensus, it will lead to the end of the PA. This, in turn, will return the occupied Palestinian territory and its people to the direct responsibility of the occupier, something the continued survival of the PA has spared Israel."